US regulator: Bitcoin exchanges must comply with money-laundering laws

Bitcoin miners must also register if they trade in their earnings for dollars.

The federal agency charged with enforcing the nation's laws against money laundering has issued new guidelines suggesting that several parties in the Bitcoin economy qualify as Money Services Businesses under US law. Money Services Businesses (MSBs) must register with the federal government, collect information about their customers, and take steps to combat money laundering by their customers.

The new guidelines do not mention Bitcoin by name, but there's little doubt which "de-centralized virtual currency" the Financial Crimes Enforcement Network (FinCEN) had in mind when it drafted the new guidelines. A FinCEN spokesman told Bank Technology News last year that "we are aware of Bitcoin and other similar operations, and we are studying the mechanism behind Bitcoin."

America's anti-money-laundering laws require financial institutions to collect information on potentially suspicious transactions by their customers and report these to the federal government. Among the institutions subject to these regulatory requirements are "money services businesses," including "money transmitters." Until now, it wasn't clear who in the Bitcoin network qualified as a money transmitter under the law.

For a centralized virtual currency like Facebook credits, the issuer of the currency (in this case, Facebook) must register as an MSB, because the act of buying the virtual currency transfers value from one location (the user's conventional bank account) to another (the user's virtual currency account). The same logic would apply to Bitcoin exchanges such as Mt. Gox. Allowing people to buy and sell bitcoins for dollars constitutes money transmission and therefore makes these businesses subject to federal regulation.

Of course, the Bitcoin network is fully decentralized. No single party has the power to issue new bitcoins or approve Bitcoin transactions. Rather, the nodes in the Bitcoin network maintain a shared transaction register called the blockchain. Nodes called "miners" race to solve a cryptographic puzzle; the winner of each race is allowed to create the next entry in the blockchain. As a reward for its effort, the winning miner gets to credit itself a standard amount, currently 25 bitcoins. Given that bitcoins are now worth more than $50 and a new block is created every 10 minutes, Bitcoin mining has emerged as a significant business.

So are Bitcoin miners subject to the regulations? "A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter," FinCEN writes. That means that if you're a lone Bitcoin miner who uses all of your proceeds to buy drugs on the Silk Road, FinCEN will not expect you to register as an MSB.

On the other hand, "a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter," and is therefore subject to federal regulations.

However, this may only apply to those who perform money transmitting services "as a business." FinCEN says that "a user of virtual currency is not an MSB under FinCEN's regulations and therefore is not subject to MSB registration, reporting, and record keeping regulations." But with a peer-to-peer currency, the line between a "user" and an "administrator or exchanger" is not at all clear. The regulations define an exchanger as someone who "engaged as a business in the exchange of virtual currency for real currency."

Many participants in the Bitcoin economy provide exchange-like services but do not do so "as a business." For example, I obtained my first bitcoins in August 2011 by giving a friend $20 in cash and getting 1.5 bitcoins (the equivalent value at the time) in exchange. My friend likely did not regard this as a business transaction, but rather as a favor to a friend. The guidelines are silent on whether someone who performs the functions of a Bitcoin exchange as a hobby or as a personal favor is required to register as a Money Services Business.

147 Reader Comments

I just don't see how they plan on enforcing this. I guess the question is, is there some way to trace where bitcoins have been? If not, then monitoring the exchanges is kind of pointless. Without the ability to "confiscate" bitcoins in a bust and trace them back to someone, I don't see how stopping laundering is possible.

You can trace exactly where bitcoins have been; the transaction register is a matter of public record, showing every transaction that has ever occurred, which wallets sent and which wallet received. The problem is you don't know who owns the wallets, not that you can't track the Bitcoins.

But when operating as a money transmitter, at some point, you have to know who owns the wallets involved in a transmission or trade. If I want to buy Bitcoins on Mt. Gox, eventually I'm going to have to give them a wallet ID for them send the Bitcoins to. They would know I own that wallet ID, and I would know they own the wallet(s) that send me coins in an amount matching the transaction I initiated. Those records would have to be kept, and such record keeping isn't difficult to enforce using existing anti-money-laundering techniques (ie. making sure the books aren't cooked.)

The problem is, once those Bitcoins have hit my registered wallet, I can easily create a hundred new wallets and spread the Bitcoins around the new, completely anonymous wallets. Since I'm not transmitting money in any real sense, I don't have to keep records of those wallets--it's very much as if I got a $100 bill from a bank (registered) and went to a bodega and broke it into $1 and $5 bills, then spent those bills. And just as I can create as many anonymous wallets as I want, so too can anyone else. There's no way to tell if I still have them, who I gave them to, etc. until some of them eventually hit another money transmitter.

Bitcoin is very much like cash, in that each individual Bitcoin unit is anonymous. But unlike cash, every Bitcoin transaction is recorded in the public, computerized register, making them both easier and harder to trace.

This gets it pretty right. Every coin can be traced infinitely from the very first time its introduced to the system. Every time coin is used in a transaction (tx), its public hash is recorded for both the sender and receiver. A tx occurs anytime the money moves, even if the coin amount doesn't change. Wallet to wallet, creates a new tx, and thusly a new public gets recorded. However wallets have zero determination of how the hash keys that correspond to the coins are created. They are basically a giant text file of rotating hash keys and nothing more. They provide no information on the current owner.

So when transferring those coins to a registered exchange account, those coins can only be confirmed as being mine once they are in the exchange account. Otherwise they could of have come from any one and any place.

I think the best part of this is that we're (the US govt.) apparently not going after Bank of America for laundering BILLIONS in actual illegal drug profits but we're all kinds of worried about small fish like bit coin. Seems a stupid thing to spend time on when compared to the drug laundering thing.

I'm alright with the government wanting to make sure financial transactions stay in the sunlight; best disinfectant and all of that.

I agree with you in spirit, but in practice not so much. When the people who write the the complex regulations get hired by the firms to make sure they are "correctly" implemented, I wouldn't call that sunlight, but kind of shaddy.

Anyone saying Bitcoins can't be regulated are missing the point. The Government isn't interested in regulating Bitcoins, they are regulating the transformation of Bitcoins into US currency, and vise versa. Without the ability to exchange Bitcoins for dollars, they expect this experiment to wither on the vine.

This is a joke, albeit a rather sad one. Given that the US allows the "Federal" Reserve to create "debt notes" (aka "money") out of thin air and then LEND them to the US Treasury -- well, it's difficult to take anything the government says about money seriously. A private central bank benefits only those bankers who own and run it. Quite a scam.

Why would Bitcoin even be on their radar? You'd imagine that they'd be busy, buying their own debt with worthless pieces of paper... imagine the excitement if Bitcoin was used in a petroleum bourse! That concept, of moving away from the "petrodollar", was enough to depose Hussein and Gadafi.

A healthy amount of skepticism is good, but if you travel around the world for a while you'll quickly see that US government regulations are stupendously awesome compared to much of the planet. We have our share of corruption and failings, but our quality of life is massively better than countries with little to no regulations for these things.

I lived in China for a bit, and I cannot up-vote this sentiment enough.

Hooray for the Rule of Law over the Rule of Force!

Some say this is a reflection of the U.S. having a high (highest?) per capita rate of lawyers

Just because the U.S. government (or any other state) claims the right to control my activities doesn't make it right. It merely means that they have the guns to enforce their rule. In this way, they're just like any other group in history that's imposed its will on others through the use of force. I didn't agree to any so-called "social contract," and I don't recognize the legitimacy of a government telling any of us what to do. I obey merely because the alternative is being shot or imprisoned.

The only thing this will do is force Bitcoin Business owners to register as an MSB or risk being swooped up and audited/shutdown. Or never operate their businesses in America. The latter is more likely to occur.

And the US Government will seize all of their assets and say that these businesses were targeting Americans. Businesses will have to comply or else the US Government will use all sorts of legal gymnastics to force them to comply.

I mean, HSBC was just let off the hook for funneling billions for some of the nastiest people in the trade, so what's the likelihood of anything happening vis a vi BitCoin?

Um, how were they let off the hook? They had to pay $1.9 billion in penalties, the largest such settlement in the history of banking. Furthermore, information turned up has led to separate cases in other nations, Brazil just announced a major investigation into HSBC and is also looking into a huge penalty and perhaps criminal charges, and I know EU regulators are looking into it as well. HSBC has been rocked to their core by this, and it is still unknown if individuals will be prosecuted for their roles as well.

Your definition of being 'let off the hook' is quite strange to me when the penalties have been extreme(and justified IMO). Were they just supposed to shut HSBC down and throw tens of thousands of people out of work and cripple the international finance system?

I mean, HSBC was just let off the hook for funneling billions for some of the nastiest people in the trade, so what's the likelihood of anything happening vis a vi BitCoin?

Um, how were they let off the hook? They had to pay $1.9 billion in penalties, the largest such settlement in the history of banking. Furthermore, information turned up has led to separate cases in other nations, Brazil just announced a major investigation into HSBC and is also looking into a huge penalty and perhaps criminal charges, and I know EU regulators are looking into it as well. HSBC has been rocked to their core by this, and it is still unknown if individuals will be prosecuted for their roles as well.

Your definition of being 'let off the hook' is quite strange to me when the penalties have been extreme(and justified IMO). Were they just supposed to shut HSBC down and throw tens of thousands of people out of work and cripple the international finance system?

I would point out its really the shareholders who got fined. And if you (assuming your not Jamie Diamond) got caught laundering money for a drug cartel, you would be in jail for a very long time, banned from working in the financial field for life. You wouldn't even be able to qualify for food stamp benefits.

Sorry for the noob question, but aren't bitcoins stored as files on a computer, or do they have to stay in special wallets?

That is, assuming person X doesn't care at all about security or theft, could person X mail a bitcoin to person Y without anything registering in the Bitcoin history until person B spends it?

If so, this seems trivial to circumvent. But I probably have no clue how bitcoins work. The reason I thought of them as files is that when the story broke about hackers stealing $600K worth of bitcoins or whatever it was, I thought they were taking files from a server which represented the bitcoins contained therein.

Your definition of being 'let off the hook' is quite strange to me when the penalties have been extreme(and justified IMO). Were they just supposed to shut HSBC down and throw tens of thousands of people out of work and cripple the international finance system?

Fining the customers of HSBC doesn't hurt the company, it's hurts the people that have HSBC bank accounts, HSBC loans, and other HSBC financial instruments.

Throw the company's board of directors in jail for 10 years, seize most of their assets as a fine, and then move on down until you run out of people with "executive" or "vice" in their job title and you'd have something justified.

Extreme would be sending their families to spend 6 months living in Medellin or Bogota on the streets.

Bitcoins are already taxable. If you gain income in bitcoins, you are responsible for paying taxes on them, as you are for any other form of income.

If you don't, then you are breaking the law. And people who evade taxes are, universally, scum. I HATE tax evaders, and personally think that using them to fill in potholes in roads is justice.

As for the regulation, this was really inevitable and its kind of sad that they didn't have these rules in place beforehand, but I suppose one cannot expect to foresee everything. Really they probably need to sit down and have a very good think about how they can best make sure that the network is made transparent to the law.

I mean, HSBC was just let off the hook for funneling billions for some of the nastiest people in the trade, so what's the likelihood of anything happening vis a vi BitCoin?

Um, how were they let off the hook? They had to pay $1.9 billion in penalties, the largest such settlement in the history of banking. Furthermore, information turned up has led to separate cases in other nations, Brazil just announced a major investigation into HSBC and is also looking into a huge penalty and perhaps criminal charges, and I know EU regulators are looking into it as well. HSBC has been rocked to their core by this, and it is still unknown if individuals will be prosecuted for their roles as well.

Your definition of being 'let off the hook' is quite strange to me when the penalties have been extreme(and justified IMO). Were they just supposed to shut HSBC down and throw tens of thousands of people out of work and cripple the international finance system?

I would point out its really the shareholders who got fined. And if you (assuming your not Jamie Diamond) got caught laundering money for a drug cartel, you would be in jail for a very long time, banned from working in the financial field for life. You wouldn't even be able to qualify for food stamp benefits.

Keep in mind that the CEO and everyone else in the company is ultimately accountable to the same shareholders that lost all that money. Who wants to bet that Diamond gets ousted post haste?

Also, some countries, such as Brazil, are indeed considering criminal charges.

Now, the question of whether corporate personhood is a good idea or not is another issue entirely.

I just don't see how they plan on enforcing this. I guess the question is, is there some way to trace where bitcoins have been? If not, then monitoring the exchanges is kind of pointless. Without the ability to "confiscate" bitcoins in a bust and trace them back to someone, I don't see how stopping laundering is possible.

Exactly what I was thinking.

Even if the did make these laws apply it only counts in the US which means every exchange outside the US can still do whatever they want. Then the fact that Bitcoin is damn near impossible to track if you know what you're doing just makes it harder to enforce. I'm sure there is some laundering going on but I don't see any viable method of actually stopping it short of killing Bitcoin which would also be damn near impossible.

One thing is for sure we'll never know how much laundering is going on via Bitcoin because if we did Bitcoin would not be living up to is purpose of anonymous currency transfer.

Your definition of being 'let off the hook' is quite strange to me when the penalties have been extreme(and justified IMO). Were they just supposed to shut HSBC down and throw tens of thousands of people out of work and cripple the international finance system?

The penalties are civil, and likely won't affect the executives at HSBC all that much. The fines will be paid by shareholders and account-holders at HSBC. Do you really think that, eg, anyone responsible will lose their yearly bonus, let alone face criminal prosecution?

There's a serious reluctance on the part of the US DoJ to prosecute larger financial institutions, and certainly no stomach to lay criminal charges. Someone caught with a joint in his/her pocket would face more serious consequences.

Anyone saying Bitcoins can't be regulated are missing the point. The Government isn't interested in regulating Bitcoins, they are regulating the transformation of Bitcoins into US currency, and vise versa. Without the ability to exchange Bitcoins for dollars, they expect this experiment to wither on the vine.

How does this rulemaking cause BitCoin to wither on the vine? There are 32,000 registered MSBs in the United States. The registration and record keeping process is not terribly onerous. It only serves to hinder money launderers from being as able to use bit coins. The US could easily write rules that actually kill bit coin (something that could follow it gaining popularity as a means of money laundering). Additionally every country with anything resembling an economy has rule making and enforcement agencies concerned with money laundering.

If anything this is a step forward to BitCoin becoming a legitimate means of currency. With US regulators giving it rulemaking equivalent to wire services, it could lead the way for other regulatory bodies to consider it in a similar light.

Now, the question of whether corporate personhood is a good idea or not is another issue entirely.

People really have no understanding whatsoever of corporate personhood.

Corporations are legal persons. This is uncontrovertial as a legal principle and has been true for well over a century. Its a legal fiction which exists in order to make corporations easy to deal with legally.

People who don't understand whine about it because they don't get it.

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If anything this is a step forward to BitCoin becoming a legitimate means of currency. With US regulators giving it rulemaking equivalent to wire services, it could lead the way for other regulatory bodies to consider it in a similar light.

The more legally accountable it becomes the more favorably it will be viewed by "real businessess".

Basically if destroying the money laundering and illegal transactions via the currency destroyed the currency, then it was never legitimate to begin with.

It's troubling but inevitable that the US would try to regulate bitcoins. They're the closest thing we have to an anonymous and fee-free electronic payment system. Anonymity in money holdings and exchanges is important in many cases, such as funding organizations that piss off the people in power, like Wikileaks. Funding Wikileaks almost surely puts one under scrutiny and the US has pressured payment processors to cut it off. Strong governments necessarily abuse their power, so if organizations are to survive challenging the incumbents, it's necessary to be able to pay them without those payments being traced. The US also seizes money without proper judicial oversight or jurisdiction, in some cases preventing defendants from hiring lawyers to defend themselves.

Also, remember why money laundering wvas originally outlawed: to fight the drug trade and organized crime. Drugs should never have been outlawed; money laundering gave governments power to enforce a violation against a fundamental right of people to put what they want in their body. As for organized crime, it thrived on the illegal drug trade. It would never have gotten as strong as it did without drug and alcohol prohibition. Human trafficking is another source of profit, but is easier to combat because people are easier to track than plants. Thus, money laundering laws were only necessary to crack down on things that generally shouldn't have been prevented in the first place.

Just because the U.S. government (or any other state) claims the right to control my activities doesn't make it right. It merely means that they have the guns to enforce their rule. In this way, they're just like any other group in history that's imposed its will on others through the use of force. I didn't agree to any so-called "social contract," and I don't recognize the legitimacy of a government telling any of us what to do. I obey merely because the alternative is being shot or imprisoned.

Anyone saying Bitcoins can't be regulated are missing the point. The Government isn't interested in regulating Bitcoins, they are regulating the transformation of Bitcoins into US currency, and vise versa. Without the ability to exchange Bitcoins for dollars, they expect this experiment to wither on the vine.

Exactly. This is no different than the regulations required to run a business exchanging dollars for any other currency. People really need to get rid of all the tinfoil hats.

I just don't see how they plan on enforcing this. I guess the question is, is there some way to trace where bitcoins have been?

Everybody on the network can see every transaction but nobody knows who made them (the sender and recipient of the transaction are both hidden by strong encryption... even the sender and recipient don't know who each other is).

Xavin wrote:

If not, then monitoring the exchanges is kind of pointless. Without the ability to "confiscate" bitcoins in a bust and trace them back to someone, I don't see how stopping laundering is possible.

That's my opinion too. Sure, you can do all the monitoring you want of people who transfer between US dollars and bitcoins, but once it's a bitcoin it is un-tracable.

On the other hand, if you are transferring a hundred thousand dollars a month to or from bitcoins... there's a pretty good chance the FBI is going to tap your phone, read your emails and text messages, and slap a GPS bug on your car. If you're a drug dealer, they probably can use this to catch you.

Your definition of being 'let off the hook' is quite strange to me when the penalties have been extreme(and justified IMO). Were they just supposed to shut HSBC down and throw tens of thousands of people out of work and cripple the international finance system?

Fining the customers of HSBC doesn't hurt the company, it's hurts the people that have HSBC bank accounts, HSBC loans, and other HSBC financial instruments.

Throw the company's board of directors in jail for 10 years, seize most of their assets as a fine, and then move on down until you run out of people with "executive" or "vice" in their job title and you'd have something justified.

Extreme would be sending their families to spend 6 months living in Medellin or Bogota on the streets.

US Banking Regulations are some of the most stringent in the world. And US regulators levy some of the largest fines against banks as well. This is why all US banks and the vast majority of all international banks spend billions of dollars in compliance & AML to ensure that they can comply with all of the rules.

If the US gov't can't control it, then they will outlaw it. It will be interesting to see how this is handled. Does seem like they don't understand the technology at all, my understanding is BTC was created to avoid exactly this problem -- regulation by governments.

Well, the US Government is a sovereign power. That kind of gives them the right to outlaw actions that seek to circumvent the legislatively-agreed-upon-rules by which we interact in society. And quite honestly, considering what happened with all of those mortgage-backed securities and derivatives voodoo when regulators were kept in the dark, I'm alright with the government wanting to make sure financial transactions stay in the sunlight; best disinfectant and all of that.

The banks are the government and they don't want competition or lack of control.

You can trace exactly where bitcoins have been; the transaction register is a matter of public record, showing every transaction that has ever occurred, which wallets sent and which wallet received. The problem is you don't know who owns the wallets, not that you can't track the Bitcoins.

I guess that just means that there needs to be a lot of plausibly deniable wallets in-between the conversion to and from fiat currency.

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Why do you need to trace anything? You basically comply with this regulation by filling out a form with the people involved in the transaction (Name/Address/SSN/etc) and the amount of the transaction and sending it in to the government. You don't have to write down the denominations and serial numbers of each bill involved or anything like that.

Because the only legitimate reason to want that kind of information is to trace the money trail in the case of laundering.

It's going to be interesting to see how governments around the world deal with this sort of thing over the next few decades. I suspect that we'll see large parts of the economy go 'dark' and become effectively untraceable and untaxed as electronic markets and currencies become larger and increasingly sophisticated.

Given time, I expect governments will struggle to maintain tax revenues as these unregulated economies grow in value.

So how does a government shut down something like Bitcoin ? It's first worth asking why they would want to. They already have ways of estimating someone's income - what's their house and car worth ? Al Capone eventually went down for tax evasion.

The reason they might decide at some point to shut Bitcoin down is if it finances an assassination market. The moment that happens, many powerful people will get very pissed off. At that point, those willing to handle large BC transactions without good ID of the counterparties start getting arrested as accessories.

It's going to be interesting to see how governments around the world deal with this sort of thing over the next few decades. I suspect that we'll see large parts of the economy go 'dark' and become effectively untraceable and untaxed as electronic markets and currencies become larger and increasingly sophisticated.

Income taxes will wane and things like property tax and sales tax will be more prevalent. It's hard to deny you own a piece of land, and it's easy to monitor and audit legitimate purchases.

It's going to be interesting to see how governments around the world deal with this sort of thing over the next few decades. I suspect that we'll see large parts of the economy go 'dark' and become effectively untraceable and untaxed as electronic markets and currencies become larger and increasingly sophisticated.

Income taxes will wane and things like property tax and sales tax will be more prevalent. It's hard to deny you own a piece of land, and it's easy to monitor and audit legitimate purchases.

I expect so. Of course we'll also see an increase in the value of 'virtual' assets which are much harder to audit and trace.

It could still end up that the most valuable property is almost entirely off the radar of governments and tax authorities.

Timothy B. Lee / Timothy covers tech policy for Ars, with a particular focus on patent and copyright law, privacy, free speech, and open government. His writing has appeared in Slate, Reason, Wired, and the New York Times.